Debt consolidation is a debt workout program that is willingly negotiated
outside of the courts. In short, debt consolidation is an agreement entered
into between the creditor and the debtor to pay back 100% of the debt
owed at terms different (and slightly more advantageous) than the controlling
terms. Typically, the debt consolidation company will first gather the
information regarding your debts, namely the accounts, the numbers, balances,
the interest rates, due dates, etc. Next, the debt consolidation company
will contact your creditors on your behalf and attempt to negotiate better
terms through either lower monthly payments and / or lower interest rates
on the balance owed.
Benefits of Chapter 13 Bankruptcy over Debt Consolidation
Sounds good! Why would I want to consider a
Chapter 13 bankruptcy OVER doing debt
consolidation? Good question….and there are several answers why
a Chapter 13 is BETTER than debt consolidation.
Percentage of Debt Repaid. In a Debt Consolidation plan, you will in all likelihood be paying back
100% of your debt – you're paying it all back! In a Chapter
13, most of the time you will be paying back LESS THAN 100% of your debt….and
many times much less!
Interest Rate. In a Debt Consolidation plan, you will typically have a reduced interest
but will still be paying back some interest on your entire balance. In
a Chapter 13, your interest rate is 0%. Nothing. You will not have to
pay any interest, late fees, collection fees or continuing court costs
in a chapter 13.
Length of time in repayment "plan." Debt Consolidation plans are typically longer than Five years because
you are paying 100% of the debt back plus some minor interest rate. In
Chapter 13, however, you are in the plan for either three (3) or five
(5) years depending on whether your household income is below or above
the median income for a similar sized household.
Relative blemish to credit score. One of the greatest hesitations in filing a bankruptcy involves the "myth"
that bankruptcy will kill your financial future. In reality, if the proper
facts and circumstances are present in an individual's life, this
belief could not be farther from the truth.
Lastly, let's take a look at the success rate. Historically, both plans
are tough to successfully complete. Why? With Debt Consolidation, not
all creditors participate in the debt consolidation plan. Because not
all creditors participate, your cash flow was be sapped by the creditors
that do not participate, thereby not leaving enough money to pay the consolidated
debt payment. Under this scenario, the likelihood of harassing creditor
calls or litigation against you is higher.
On the other hand, Chapter 13's, while still tough, are more likely
- One, ALL creditors MUST participate – they cannot "opt"
out. The federal law requires that they participate or they are discharged
without having any money paid on their claim.
- Two, because you are typically paying a percentage of the overall debt
owed in a Chapter 13, it is easier to make your payments compared to paying
all of your debt back in a debt consolidation plan. Therefore, Chapter
13s are more likely to be successfully completed.
- Three, you are not paying any interest on your unsecured debt (i.e., credit
cards). Again, more of your money is going to pay your principal and less
(or none!) to interest, your money is working harder to get you debt free.
Effect on Your Credit Score
Debt consolidation will negatively affect your creditor score. Typically,
before entering into a plan, most debtors have been or continue to be
past due on their monthly payments. This will negatively affect your FICO
or Beacon score. Furthermore, once you enter into the debt consolidation
plan, the credit reporting agencies will negatively report on your credit
unless you make every payment on time.
Chapter 13 will negatively impact your credit score in the beginning. Typically,
a chapter 13 will be reported on your credit for approximately two years
after the filing of your petition. And depending upon how late you were
on your payments prior to selecting debt consolidation or chapter 13,
the chapter 13 filing could be a deeper blemish in the short term. If
you successfully make you payments to the chapter 13 trustee, however,
your credit score net impact may actually be positive in a shorter amount
of time after a chapter 13. It is like taking one step backwards, that
allows you to take three steps forward! You have a deeper blemish immediately
(i.e., bankruptcy on your record) but if you make the payments on time
and are debt free quicker, your credit score will climb higher faster!
In other words, bankruptcy can and many, many times does help to rehabilitate
someone's credit score.
Learn more about your options by
contacting LeavenLaw today!